Rev. Proc. 2016-44: A Catalyst for Public-Private Partnerships?

The US has historically taken a very different approach to much of its infrastructure development and finance. For more than a century, state and local governments ("public owners") have borrowed in the US municipal finance market to finance much of the country's public infrastructure, securing relatively low interest rates due to their creditworthiness and the tax-exempt status of interest on their borrowings. Unfortunately, Internal Revenue Code requirements have made it difficult for a public owner to borrow on a comparable tax-exempt basis and realize the life-cycle benefits that the P3 model offers.

With the release of Revenue Procedure (Rev. Proc.) 2016-44 on August 22, 2016, amended on September 2, 2016, public owners should much less frequently face the costly choice between using tax-exempt finance and capturing life-cycle benefits. The availability of tax-exempt financing comparable to that under a DBB model should eliminate any argument against the P3 model based on the difference in cost between tax-exempt public financing and taxable private financing.

This Revenue Procedure facilitates public owners' use of the P3 model in combination with the same type of direct, tax-exempt borrowing in the US municipal finance market that they could achieve using the DBB or a design-build (DB) model. At first blush, Rev. Proc. 2016-44 would seem a powerful catalyst for widespread adoption of the P3 model, facilitating a potent combination of low-cost, tax-exempt financing and life-cycle benefits. However, it has yet to be hailed by P3 market participants as such a "game-changer."